Last week, I wrote about why states have a significant fiscal incentive to drop out of Obamacare’s expansion of the Medicaid program. States fear, among other things, that the federal government will shift more of the program’s costs to the states over time, leaving states with an unsustainable spending commitment. It turns out that this fear isn’t merely theoretical. During the “supercommittee” deficit-reduction talks last year, President Obama proposed reducing federal funding for the Medicaid expansion by $100 billion over ten years, with states picking up the difference. No wonder governors from both parties are thinking twice about the program.

“It’s not free,” says Florida Gov. Rick Scott (R.). “You’re still paying it…they’re only going to cover [all of the Medicaid expansion] in the first three years. Then Florida taxpayers are going to be on the hook…Eventually we’ll be on the hook for 50, 45 percent of it. Look. Government health-care programs, everywhere in the world, do three things. They promise you the world, they say ‘Oh, we’re going to cover everything.’ Then what they do is, they run out of money, and they underpay hospitals and doctors, and guess what happens? [Doctors] don’t want to take care of you. There’s fewer of them.”

As you’ll recall, the federal government and the states share the funding responsibility for Medicaid. The federal government’s portion of the funding is calculated using a formula called the Federal Medical Assistance Percentage, or FMAP. For the pre-Obamacare Medicaid program, the feds paid on average 57 percent of the program’s costs. For the post-Obamacare expansion, the feds are picking up 90-100 percent of the near-term costs, with no firm assurances of what will happen after 2020.

Obama proposed shifting $100 billion in costs to the states

During the supercommittee talks, President Obama proposed reducing federal Medicaid spending by $100 billion over ten years. His main idea was to blend the traditional FMAP rate with the more generous Obamacare funding formula, with the end result being a smaller overall federal contribution to the program, and a larger state-based one.

The New York City public hospital system, which has a big Medicaid population, sounded the alarm. “The President’s original proposal to blend FMAP rates…could cost New York State $11.5 billion ($23 billion gross) over 10 years and New York City $6.5 billion ($13 billion gross) over 10 years,” wrote the NYC Health and Hospitals Corporation in a November 2011 report.

A 2011 Congressional report, jointly authored by Sen. Orrin Hatch (R., Utah) and Rep. Fred Upton (R., Mich.), estimated that the Medicaid expansion would cost states at least $118 billion through 2023. (Their estimates were largely based on those from the Kaiser Family Foundation.) That figure would likely go up significantly over the following decade, as medical inflation exceeds that of the economy, and federal matching rates decline.

The President’s official budget for fiscal year 2013 also proposed blending the Medicaid funding rates, though with a much smaller spending reduction of $18 billion over ten years. Nonetheless, “This policy could have a dramatic effect on how much a Medicaid expansion could cost State governments after 2014,” write Hatch and Upton in a letter they sent today to Health and Human Services Secretary Kathleen Sebelius. “We believe the Administration should release all the legislative and policy specifications for its blended rate proposal as governors and State legislatures prepare to make a decision on whether or not to implement the largest expansion of Medicaid in history.”

Medicaid spending far outpaces revenue growth

As Dan Diamond notes, a recent report from the State Budget Crisis Task Force makes plain how runaway growth in Medicaid spending is crowding out other essential programs, like education and policing. "Those high costs have backed officials into a corner," writes Dan:

The task force offers a stark assessment: "Medicaid spending growth is crowding out other needs" for states and imperiling their fiscal sustainability.

The report also found that Medicaid currently represents about one-quarter of states' general fund spending; the program's costs to states grew at 7.2% per year across the last decade, far outpacing the 3.9% growth rate for state revenue.

Those high costs have backed officials into a corner, forcing them to continually come up with new ways to slice health spending. According to the Kaiser Family Foundation's annual survey, nearly every state has cut Medicaid provider payments in the past two years. (The three that haven't: Alaska, North Dakota, and West Virginia.) And with states continuing to reel from the economic downturn, those pressures won't abate anytime soon.

"It's hard to blame them for being wary," Dan concludes.

Higher costs + less flexibility = raw deal for states

As former Bush economist Keith Hennessey points out, federal money comes with strings attached. And the strings seem to multiply with time. “What happens…if the Feds want to impose new requirements on the exchanges, and then require states to do the same with their Medicaid programs?” he asks. “The Feds have a history of doing this with Medicaid.”

According to Politico, last weekend at the National Governors Association meeting in Virginia, five Republican governors proposed an interesting compromise: possibly going along with the Medicaid expansion, if it was paired with block-granting the program. “I’m with those folks who say, if you can block grant us Medicaid, we’d look at it differently,” said Gov. Bill Haslam of Tennessee. He was joined in this sentiment by fellow GOPers Bob McDonnell (Va.), Dave Heineman (Neb.), Gary Herbert (Utah), and Matt Mead (Wyo.).

But that’s a compromise that would only become relevant if President Obama wins re-election, and/or Democrats retain control of the Senate. Mitt Romney has pledged to repeal Obamacare and institute block grants for Medicaid. “Let states care for their own people in the way they think best. That, in my view, is the best way to care for the uninsured,” said Romney in June.

At the end of the day, the most humane way to provide health care to the poor is to offer them subsidies to buy private insurance: something that Obamacare offers to those above the poverty line, but not below it, albeit in an overregulated and costly form. Block-granting Medicaid would allow states to provide higher-quality care, at lower cost, to their most vulnerable populations.

Unfortunately, President Obama’s proposal moves us in precisely the opposite direction: poorer-quality care, in which states’ only legal avenue for reduced spending involves further cutting payments to doctors and hospitals, making it even harder for low-income Americans to get the health care they need.

PROGRAMMING NOTE: I’m going to try to slow down on blogging for the next two months, in order to concentrate on some work-related projects. My Twitter and RSS feeds, along with the weekly e-mail digest, will keep you up-to-date on my latest posts.